A recent Virginia Supreme Court decision challenges what most people think of when they hear the word “contract.” In that decision, the Court ruled that even a quick description of key terms signed by both parties, but not formalized as an agreement, can be fully enforceable. In that case, a 22-line term sheet agreed to during a mediation session between an investor and a company was enforceable as a contract for payment of $3 million in settlement funds plus $12 million upon sale of the business.
The case involved a lawsuit between a Virginia technology company and two of its former business partners, Terry and Sandra Lin. The company, LongView International Technology, sued Terry Lin in Fairfax circuit court, and Terry and his wife Sandra responded with counterclaims. The parties disputed whether Ms. Lin owned company stock and the value of that stock.
The defendants insisted that the term sheet was not binding and that the parties could never reach agreement on the detailed language of a formal document. The term sheet did not describe when the first installment on the $3 million would be paid. It also did not state what qualified as a sale of the business and whether Ms. Lin’s $12 million payout upon sale would be superior to other debt of the company, or subordinate to that debt. The parties could never agree on such specifics after they signed the term sheet.
The Lins argued in response that the company viewed the term sheet as binding because it asked the circuit court to cancel the trial after the term sheet was signed because the case was settled. Additionally, the term sheet never said that the parties’ agreement was subject to the signing of a more formal contract. Rather, it said that the parties intended to be fully bound by its terms.
The Virginia Supreme Court agreed with the Lins and ruled that the term sheet was enforceable. The circuit court had ruled that installment payments should have started the same day the term sheet was signed, with a first payment made within the next three months, and the Virginia Supreme Court agreed. The Court found that the $12 million payment upon sale provision was sufficiently definite as to be enforceable, even though the word “sale” was not defined. Because the company had not yet been sold, the Court left to future litigation a decision on how that word should be interpreted.